If you’ve ever considered purchasing a real estate site selection model, you know that the industry is filled with unfamiliar terms. Researching the various solutions can feel daunting, but fortunately it doesn’t have to be that way.
In this blog, we’ll explain the three most common real estate site selection model types so you can navigate the vendor landscape like a pro. No statistics degree required.
Customer Value Model
What is it? Customer value models are based on a core real estate principle: success is driven by having the right types of customers within the right distance of your location.
An analyst defines who your best customers are and then calculates how far those customers travel to visit your existing locations. Once you understand the types of customers and the average drive time trade area around your best existing locations, you can apply those definitions to evaluate the customer potential of a new site.
What is the output of the model? The customer value model output is an index score that helps you to understand how the customers around the potential site compare to the customers around your existing sites. For example, if a site has a customer value score of 120, that means it is 20% better from a potential customer perspective than your existing sites. The score sheet often lists other demographic information to help you better understand the trade area.
Is it for me? Customer value models are ideal for companies with 0-20 locations that have been open for at least a year. The models can even be developed for companies that don’t collect customer data, since a customer profile can be developed based on similar concepts.
What is it? Benchmark models build on customer value models by introducing other factors that influence location performance, such as competition and cotenants. The process still begins with defining your best customers and calculating your drive time trade area, but continues by testing a combination of variables to identify the ones that explain performance.
What is the output of the model? A benchmark model produces an index score that compares the expected performance of a site to your existing sites, based on the variables included in the model. The site score sheet usually lists the individual variables that make up the overall score, so you can dive deeper into understanding the site’s dynamics.
Is it for me? If you have 21-50 locations that have been open for at least a year, then a benchmark model is likely a great fit for you.
What is it? A predictive model, also called a forecasting model, is the most complex of the three site selection model types. It builds on the benchmark model by looking at how your locations affect each other, which is referred to as “cannibalization.” Additionally, the predictive model is built in a way that enables you to forecast a specific performance indicator, such as sales, number of units sold, or number of visits.
What is the output of the model? Unlike a customer value or benchmark model, a predictive model produces an actual performance forecast, such as $1.2 million in annual sales. Index scores for the underlying variables are usually provided.
Is it for me? Producing a statistically reliable forecast requires a large sample set of good quality data. Companies with 51+ locations open for at least a year typically have the data required to develop a predictive model.